What changed in this filing

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Item 1. Business

2023-02-15 compared with 2022-02-16 · 157 added, 113 removed, 255 unchanged (51% of the section changed)

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contract machining;

metal parts stamping, fabrication and painting;

metal parts stamping;

fabrication and painting;

and production of plastic thermoformed horticultural containers, life science and industrial packaging, material handling components and extruded raw material stock.

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INVESTMENT AND GROWTH STRATEGY

We maintain a moderate risk profile by investing in rate base growth opportunities in our Electric segment and organic growth opportunities in our Manufacturing and Plastics segments.

We maintain a moderate risk profile by investing in rate base growth opportunities in our Electric segment and organic growth opportunities in our Manufacturing and Plastics segments (collectively, our manufacturing platform).

This strategy and risk profile are designed to provide a more predictable earnings stream, maintain our credit quality and preserve our ability to fund our dividend payments.

Our goal is to deliver annual growth in earnings per share between five and seven percent over the next several years, using 2020 diluted earnings per share as the base for measurement.

We expect our earnings growth to come from rate base investments in our Electric segment and from existing capacities and planned investments within our Manufacturing and Plastics segments.

We will continue to review our business portfolio to identify additional opportunities to improve our risk profile, enhance our credit metrics and generate additional sources of cash to support the organic growth opportunities in our electric utility and manufacturing and plastics segments.

We will also evaluate opportunities to allocate capital to potential acquisitions within our Manufacturing and Plastics segments.

Our long-term focus remains on executing our strategy to grow our business and achieving operational, commercial and talent excellence to strengthen our position in the markets we serve.

We remain confident in our ability to achieve a compounded annual growth rate in earnings per share in the range of five to seven percent using 2024 as the base year.

We currently expect to see elevated earnings per share from our manufacturing platform into 2023 with our earnings mix expected to move to approximately 65% from our Electric segment and 35% from our manufacturing platform beginning in 2024.

We expect our earnings growth beyond 2024 to be driven by rate base investments in our Electric segment and from existing capacities and planned investments within our Manufacturing and Plastics segments.

Over the past two years, we delivered earnings growth well in excess of our five to seven percent target due to unique industry conditions within the PVC pipe industry which led to extraordinary revenue, earnings and cash flow growth in our Plastics Segment.

We will also evaluate opportunities to allocate capital to potential acquisitions.

We are a committed long-term owner and do not acquire companies in pursuit of short-term gains.

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• Have a strong management team committed to operational and commercial excellence.

Over time, we expect our Electric segment will provide approximately 70% of our overall earnings and our Manufacturing and Plastics segments will collectively provide approximately 30% of our overall earnings and continue to be a fundamental part of our strategy.

Our actual mix of earnings for the years ended December 31, 2021, 2020, 2019 was as follows:

Our 2021 earnings mix was impacted by significantly higher earnings in our Plastics segment as unique supply and demand conditions during the year in the PVC pipe industry led to earnings levels not previously experienced.

We expect our earnings mix to return back to our targeted mix of 70% from the Electric segment and 30% from the Manufacturing and Plastics segments over the long term as these industry conditions subside.

Our actual mix of earnings for the years ended December 31, 2022, 2021, and 2020 was as follows:

HUMAN CAPITAL

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Our 2022 Total Recordable Incident Rate was 2.08, compared to 1.86 in 2021 and our Lost Time Incident Rate was 0.49, compared to 0.57 in 2021.

In both 2021 and 2020 these rates were favorable to the rates of our peers.

Leadership Development and Training Programs - We extend leadership development throughout the organization to build enterprise-wide understanding of our culture, strategy and processes.

In both 2022 and 2021 these rates were favorable when compared to the rates of our peers.

Employee and Leadership Development, Succession Planning and Training Programs - We invest in leadership development for various levels of employees, management and leaders throughout the Company to build enterprise-wide understanding of our culture, strategy and processes.

Annual succession planning, individual development planning, mentoring, and supervisory and leadership development programs all play a role in ensuring a capable leadership team now and in the future.

Our skill progression and technical training programs help to retain a stable and skilled workforce.

Workforce Stability - Retaining and developing our employees is an important factor in our continued success and growth.

We regularly evaluate our employee retention and turnover rates.

Employee Engagement - To enhance productivity and employee engagement, and to help our companies continue to be places where our employees choose to work and thrive, we have undertaken a multi-year series of employee engagement surveys.

We use the feedback to help shape the future of our organization.

Code of Business Ethics - We communicate annually to all employees on our code of business ethics to reinforce our commitment to compliance with laws, regulations and values that guide who we are and how we do business.

Across our operating companies and including our corporate team as of December 31, 2021, we employed 2,487 full-time employees:

Workforce Stability - Recruiting, retaining and developing employees is an important factor in our continued success and growth.

We regularly evaluate our recruiting programs, employee retention and turnover rates.

Employee Engagement - To enhance the effectiveness of our workforce and to help our companies continue to be places where our employees choose to work and thrive, we have undertaken a multi-year series of employee engagement surveys.

We use the feedback to help shape the employee programs of our organization.

Diversity, Equity, and Inclusion - We expect, and are committed to, diversity, equity and inclusion as part of who we are, what we value and how we achieve individual, business and community success.

We hold every employee accountable for their behavior in maintaining a workplace free of discrimination and harassment.

We have implemented education initiatives for all employees, aimed at inclusive leadership and a respectful workplace, focused on identities and culture, unconscious bias, the power of diverse teams and culturally sensitive conversations.

We have implemented initiatives to improve upon our demographic profile, including revised hiring processes and a commitment to diverse interview slates.

Code of Business Ethics - We require employees to complete training on several topics associated with our code of business ethics to reinforce our commitment to compliance with laws, regulations and values that guide who we are and how we do business.

As of December 31, 2022, we employed 2,422 full-time employees as shown in the table below:

Segment/Organization Employees

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Labor costs associated with employees working at jointly-owned facilities are allocated to each of the co-owners based on their ownership interest.

At December 31, 2021, 358 employees of OTP are represented by local unions of the International Brotherhood of Electrical Workers under two separate collective bargaining agreements expiring on August 31, 2023 and October 31, 2023.

At December 31, 2022, 354 employees of OTP were represented by local unions of the International Brotherhood of Electrical Workers under two separate collective bargaining agreements expiring on August 31, 2023 and October 31, 2023.

OTP has not experienced any strike, work stoppage or strike vote, and considers its present relations with employees to be good.

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The demographics of our workforce, including our Board of Directors, as of December 31, 2022 was as follows:

% Female % Racially and Ethnically Diverse

% Female % Racially and Ethnically Diverse % Female % Racially and Ethnically Diverse

Board of Directors (1)

36 % 9 % 20 % 10 %

CEO Direct Reports 33 % — % 33 % — %

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Non-Management Employees 16 % 19 % 17 % 19 %

(1) Includes the new director appointed to our Board effective January 1, 2022.

(1) 2022 includes the new directors appointed to our Board effective January 1, 2023.

ELECTRIC Contribution to Operating Revenues:

38% (2022), 40% (2021), 50% (2020)

OTP, headquartered in Fergus Falls, Minnesota, is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve its more than 133,000 residential, industrial and commercial customers in a service area encompassing approximately 70,000 square miles of western Minnesota, eastern North Dakota and northeastern South Dakota.

OTP, headquartered in Fergus Falls, Minnesota, is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve its more than 133,000 residential, commercial and industrial customers in a service area encompassing approximately 70,000 square miles of western Minnesota, eastern North Dakota and northeastern South Dakota.

Our service territory is predominantly rural and agricultural and includes over 400 communities, most of which have populations of less than 10,000.

While our customer base includes relatively few large customers, sales to commercial and industrial customers are significant, with one industrial customer accounting for 10% of segment operating revenues for the year ended December 31, 2021.

While our customer base includes relatively few large customers, sales to commercial and industrial customers are significant, with one industrial customer accounting for 11% and 10%, respectively, of segment operating revenues for the years ended December 31, 2022 and 2021.

The following charts summarize our retail electric revenues by state and by customer segment for the years ended December 31, 2022 and 2021:

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GENERATION AND PURCHASED POWER

OTP primarily relies on company-owned generation, supplemented by purchase power agreements, to supply the energy to meet our customer needs.

OTP primarily relies on company-owned generation, supplemented by power purchase agreements, to supply the energy to meet our customer needs.

Wholesale market purchases and sales of electricity are used as necessary to balance supply and demand.

Our mix of owned generation and wholesale market energy purchases to meet customer demand are impacted by wholesale energy prices and the relative cost of each energy source.

As of December 31, 2021, OTP’s wholly or jointly owned plants and facilities, as well as in place purchased power agreements, and their dependable kilowatt (kW) capacity were:

As of December 31, 2022, OTP’s wholly- or jointly-owned plants and facilities, as well as in place power purchase agreements, and their dependable kilowatt (kW) capacity were:

Purchased Power

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Total Owned Generation Capacity 1,040,400

Purchased Power Agreements:

Power Purchase Agreements:

Purchased Wind Power (rated at nameplate and greater than 2,000 kW)

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(2) Reflects OTP's 35.0% ownership percentage of jointly-owned facility.

(3) OTP acquired the assets of the Ashtabula III wind farm on January 3, 2023.

The following charts summarize the percentage of our generating capacity by source, including owned and jointly-owned facilities and through power purchase arrangements, as of December 31, 2022 and 2021:

Under MISO requirements, OTP is required to have sufficient capacity through wholly or jointly-owned generating capacity or purchased power agreements to meet its monthly weather-normalized forecast demand, plus a reserve obligation.

OTP met its obligation for the 2020-2021 planning year and anticipates meeting this obligation prospectively.

The following charts summarize the percentage of retail kilowatt-hours (kwh) sold by source during the years ended December 31, 2021 and 2020:

Under MISO requirements, OTP is required to provide sufficient capacity through wholly- or jointly-owned generating capacity or power purchase agreements to meet its monthly weather-normalized forecast demand, plus a reserve obligation.

On August 31, 2022, FERC issued an order to approve MISO's proposal to revise its resource adequacy requirement, including the adoption of a seasonal resource adequacy construct rather than a single requirement based on a summer peak.

MISO proposed the seasonal adequacy construct to address significant increases in emergency declarations that occur throughout the year, driven by factors including declining excess reserve margin, generation retirements, reliance on intermittent resources and outages resulting from extreme weather events.

These new provisions will be implemented in the 2023/2024 planning year.

Under the new seasonal resource adequacy construct, the seasonal reserve margin requirements deviate significantly from MISO’s 2022/2023 annual planning reserve margin requirements.

For planning year 2022/2023, the last year under the

annual construct, our required planning reserve margin was 8.7%.

For planning year 2023/2024, under the new seasonal construct, our planning reserve margin requirements range between 7.4% and 25.5%, depending on the season.

The following charts summarize the percentage of retail kwh sold by source during the years ended December 31, 2022 and 2021:

Capacity Retirements and Additions

Hoot Lake Plant , our 142-megawatt coal-fired power plant in Fergus Falls, Minnesota was retired in mid-2021.

As part of our investment plan to meet our future energy needs, we have the following significant projects at various stages of planning and construction or that have been recently completed:

As part of our investment plan to meet our future energy needs, the following significant projects are at various stages of planning and construction or have been recently completed:

Merricourt Wind Energy Center (Merricourt) is a 150-megawatt wind farm located in southeastern North Dakota.

Construction of the wind farm commenced in 2019 and the facility was placed into commercial operation in December 2020, with a total cost of approximately $260 million.

The facility was placed into commercial operation in December 2020, with a total cost of approximately $260 million.

Astoria Station Natural Gas Plant (Astoria) is a 245-megawatt simple cycle natural gas combustion turbine generation facility near Astoria, South Dakota.

Construction commenced in 2019 and the facility was placed into commercial operation in February 2021, with a total cost of approximately $160 million.

Hoot Lake Solar is a 49-megawatt solar farm under development on land on and around our Hoot Lake Plant in Fergus Falls, Minnesota, with an anticipated cost of approximately $60 million.

The facility was placed into commercial operation in February 2021, with a total cost of approximately $160 million.

Hoot Lake Solar is a 49-megawatt solar farm under construction on and around our Hoot Lake Plant property in Fergus Falls, Minnesota, with an anticipated cost of approximately $60 million.

We anticipate the facility will be in commercial operation by the end of 2023.

Ashtabula III Wind Farm is a 62-megawatt wind farm located in eastern North Dakota.

The facility was purchased for approximately $50 million in January 2023.

Prior to the purchase of the wind farm assets, we were purchasing the wind-generated electricity from the wind farm pursuant to a power purchase agreement.

ENERGY TRANSITION

Otter Tail Power is committed to transitioning to a lower-carbon and increasingly clean energy future, while maintaining low cost and reliable electricity to serve our customers.

We have developed the following goals in the furtherance of our efforts to support the energy transition:

Provide 30% of energy generated from renewable resources to our customers by 2023 .

Reduce carbon emissions from owned generation resources by 50% by 2025 from 2005 levels.

Reduce carbon emissions from owned generation resources by 97% by 2050 from 2005 levels.

To date, we have undertaken numerous initiatives to reduce our carbon footprint and mitigate greenhouse gas emissions in the process of generating electricity for our customers.

Our initiatives include increasing the efficiency of our plants, adding renewable energy to our resource mix and sponsoring energy conservation programs.

From 2005 through 2021, we have reduced our carbon dioxide emissions approximately 39% and increased the amount of renewable generation resources we own or contract through purchase power agreements by approximately 370 megawatts.

Our future resource plans to deliver low-cost, reliable and increasingly clean energy to our customers include the addition of 49 megawatts of solar energy from Hoot Lake Solar in 2023 along with the resource additions as outlined in our Integrated Resource Plan, including the addition of 150 megawatts of solar generation and 100 megawatts of wind generation by 2027.

Our resource plan also proposes to withdraw from Coyote Station, our jointly owned coal-fired generation facility by the end of 2028.

The following chart depicts our energy resource mix in 2005 and 2021 and the projected mix in 2025 and 2030 if our preferred plan within our Integrated Resource Plan is approved in each of the jurisdictions in which we operate.

The amounts include energy generated from owned resources, procured through purchase power agreements and energy purchased in the wholesale market:

OTP is committed to transitioning to a lower-carbon and increasingly clean energy future, while maintaining affordable and reliable electricity to serve our customers.

We have developed the following goals in furtherance of our efforts to support the energy transition:

Own or purchase energy generation that’s more than 50% renewable by 2025 .

Reduce carbon emissions from owned generation resources 50% by 2025 from 2005 levels.

Reduce carbon emissions from owned generation resources 97% by 2050 from 2005 levels.

To date, we have undertaken numerous initiatives to reduce our carbon footprint and mitigate greenhouse gas (GHG) emissions in the process of generating electricity for our customers.

Our initiatives include increasing the efficiency of our plants, retiring Hoot Lake Plant, adding renewable energy to our resource mix and sponsoring energy conservation programs.

From 2005 through 2022, we have reduced our carbon dioxide (CO 2 ) emissions approximately 43% and increased the amount of renewable generation resources we own or purchase through power purchase agreements by approximately 370-megawatts.

Our future resource plans to deliver affordable, reliable, and increasingly clean energy to our customers include the addition of 49-megawatts of solar energy from Hoot Lake Solar in 2023 and repowering various wind farm assets to increase their efficiency and output.

The following chart depicts our energy resource mix, which is the electricity we use to serve our customers, in 2005 and 2022 and the projected mix in 2030 and 2050.

The amounts include energy generated from owned resources, procured through power purchase agreements and energy purchased in the wholesale market:

Inflation Reduction Act

On August 16, 2022, the Inflation Reduction Act of 2022 (IRA) was signed into law.

The IRA includes funding for climate and clean energy investments and other provisions affecting corporate taxpayers.

The climate and clean energy provisions of the IRA include, among other items, i) the extension of the traditional production tax credits (PTC) and investment tax credits (ITC) for renewable technologies (including wind and solar) if construction is begun before 2025, along with elimination of the existing phase-down of the PTC and ITC, and transitions to a new technology neutral credit for property placed in service after 2024, ii) a new PTC for sale of domestically produced electricity with a GHG emission rate of not greater than zero produced at a qualifying facility placed in service after 2024, iii) a new ITC for investment in qualifying zero-emission electricity generation facilities or energy storage technology placed in service after 2024, and iv) alternative ways to monetize renewable tax credits by allowing certain entities to sell tax credits to third parties.

The tax incentives provided under the IRA are intended to incentivize the transition to a cleaner energy economy and to reduce GHG emissions from the electric utility industry.

These financial incentives could impact the planning of our future generation resources and our long-term capital spending plan.

See the Integrated Resource Plan (IRP) section below for additional details on how the passage of the IRA has impacted our recently filed IRP.

RESOURCE MATERIALS

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We source coal for our coal-fired power plants through requirements contracts which do not include minimum purchase requirements but do require all coal necessary for the operation of the respective plant to be purchased from the counterparty.

Our coal supply contracts for our Big Stone Plant and Coyote Station have expiration dates in 2022 and 2040, respectively.

Our coal supply contracts for our Big Stone Plant and Coyote Station have expiration dates in 2024 and 2040.

The supply agreement between the Coyote Station owners, including OTP, and the coal supplier includes provisions requiring the Coyote Station owners to purchase the membership interests and pay off or assume loan and lease obligations of the coal supplier, as well as complete mine closing and post-mining reclamation, in the event of certain early termination events and at the expiration of the coal supply agreement in 2040.

See Note 1 to our consolidated financial statements included in this report on Form 10-K for additional information.

See below and Note 1 to our consolidated financial statements included in this report on Form 10-K for additional information.

Coal is transported to our non-mine-mouth facility, Big Stone Plant, by rail and is provided under a common carrier rate which includes a mileage-based fuel surcharge.

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In addition, we earn revenue from the transmission of electricity over our wholly- or jointly-owned transmission assets for others under approved rate tariffs.

As of December 31, 2021, we were the sole or joint owner of over 9,000 miles of transmission and distribution lines.

Midcontinent Independent System Operator, Inc.

As of December 31, 2022, we were the sole or joint owner of nearly 15,000 miles of transmission and distribution lines.

Midcontinent Independent System Operator

MISO is an independent, non-profit organization that operates the transmission facilities owned by other entities, including OTP, within its regional jurisdiction and administers energy and generation capacity markets.

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MISO seeks to optimize the efficiency of the interconnected system, provide solutions to regional planning needs and minimize risk to reliability through its security coordination, long-term regional planning, market monitoring, scheduling and tariff administration functions.

In 2022, MISO approved several projects within the first tranche of its long-range transmission plan, which includes two new 345 kV transmission projects and a project to upgrade an existing transmission line.

OTP will have a varying level of ownership interest in these projects, which will be completed over several years, and our total capital investment in these projects is anticipated to be approximately $390 million.

Electricity demand is affected by seasonal weather differences, with peak demand occurring in the summer and winter months.

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(NDPSC) Retail rates, certain issuances of securities, construction of major utility facilities and other matters.

Approval of site and routes for new electric generating facilities (500 kW or more for wind generating facilities;

50,000 kW for non-wind generating facilities) and high voltage transmission lines (115 kV or more).

Review and approval of ten-year facility plan and Integrated Resource Plan.

Approval of site and routes for new electric generating facilities (>500 kW for wind generating facilities;

>50,000 kW for non-wind generating facilities) and high voltage transmission lines (>115 kV).

Review and approval of fifteen-year Integrated Resource Plan.

South Dakota Public Utilities Commission

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In Minnesota, fuel and purchased power costs are estimated on an annual basis and the accumulated difference between actual and estimated cost per kwh are refunded or recovered, subject to regulatory approval, in subsequent periods.

Transmission Cost Recovery Rider (TCR) MN, ND, SD Provides for recovery of costs outside of a general rate case for investments in new or modified electric transmission or distribution assets.

Environmental Cost Recovery Rider (ECR) MN, ND, SD Provides for recovery of costs outside of a general rate case for investments in certain environmental improvement projects.

Renewable Resource Rider (RRR) MN, ND Provides for recovery of costs outside of a general rate case for investments in certain new renewable energy projects.

Conservation Improvement Program (CIP) MN Under Minnesota law, OTP is required to invest at least 1.5% of its gross operating revenues on energy conservation improvements.

Transmission Cost Recovery Rider (TCR) MN, ND, SD Provides for the recovery of costs outside of a general rate case for investments in new or modified electric transmission assets and certain MISO transmission service and related costs.

Environmental Cost Recovery Rider (ECR) MN, ND, SD Provides for the recovery of costs outside of a general rate case for investments in certain environmental improvement projects.

Renewable Resource Rider (RRR) MN, ND Provides for the recovery of costs outside of a general rate case for investments in certain new renewable energy projects.

Conservation Improvement Program (CIP) MN Under Minnesota law, OTP is required to save 1.75% of its gross retail energy revenues through the energy conservation and optimization program.

Recovery of these costs outside of a general rate case occurs through the CIP rider.

Electric Utility Infrastructure Costs Rider (EUIC) MN Provides for recovery of costs for investments made to replace or modify existing infrastructure if the replacement or modification conserves energy or uses energy more efficiently.

Electric Utility Infrastructure Costs Rider (EUIC) MN Provides for the recovery of costs for investments made to replace or modify existing infrastructure if the replacement or modification conserves energy or uses energy more efficiently.

Advanced Meter and Distribution Technology Cost Recovery Rider (AMDT) ND Provides for the recovery of costs for advanced metering infrastructure, outage management systems and demand response projects.

Generation Cost Recovery Rider (GCR) ND Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Energy Efficiency Plan (EEP) SD Provides for the recovery of costs from energy efficiency investments.

Phase-In Rider (PIR) SD Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Renewable Energy Standard

Minnesota has a renewable energy standard requiring utilities to generate or procure sufficient renewable generation such that the following percentages of total retail electric sales to Minnesota customers come from qualifying renewable sources:

20% by 2020 and 25% by 2025.

We met the current renewable sources requirements with a combination of owned renewable generation and purchases from renewable generation sources.

Minnesota law also requires 1.5% of total Minnesota electric sales by public utilities to be supplied by solar energy.

For a public utility with between 50,000 and 200,000 retail electric customers, such as OTP, at least 10% of the 1.5% requirement must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40 kWs or less.

OTP plans to purchase Solar Renewable Energy Credits (SRECs) to meet its obligations until its Hoot Lake Solar and other solar projects are complete and operational.

OTP plans to purchase SRECs to meet its 2021 obligation, for which compliance will be measured as of April 30, 2022.

Under certain circumstances and after consideration of costs and reliability issues, the MPUC may modify or delay implementation of the standards.

We are evaluating potential options for maintaining compliance and meeting the solar energy standard beyond 2021.

Integrated Resource Plan (IRP)

Phase-In Rider (PIR) SD Provides for the recovery of costs outside of a general rate case for investments in new generation facilities and advanced grid infrastructure.

Integrated Resource Plan

Under Minnesota law, utilities are required to submit for approval by the MPUC a 15-year advance IRP.

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Typically, IRPs are submitted every two years.

In 2021, the North Dakota Legislative Assembly enacted a provision requiring investor-owned electric utilities to submit an IRP to the NDPSC and granted the NDPSC the authority to adopt rules and regulations for the preparation and submission of integrated resource plans.

To date, the NDPSC has not established any formal rules and regulations.

On September 1, 2021, OTP filed its 2022 IRP concurrently with regulators in the three states where OTP operates, Minnesota, North Dakota and South Dakota.

The 2022 IRP includes OTP’s preferred plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates.

The components of OTP's preferred plan include:

• the addition of dual fuel capability at our Astoria Station natural gas plant, allowing for the plant to burn fuel oil in addition to natural gas;

• the addition of 150 megawatts of solar generation in 2025;

• the addition of 100 megawatts of wind generation in 2027;

• the commencement of the process of withdrawing from our 35 percent ownership interest in Coyote Station, a jointly owned, coal-fired generation plant, by December 31, 2028;

• the addition of 50 megawatts of solar generation in 2033.

The 2022 IRP includes requests for approval of certain activities planned to commence within the next five years, which include the addition of dual fuel capacity at our Astoria Station natural gas plant, the addition of 150 megawatts of solar generation and commencement of the withdrawal from our ownership interest in Coyote Station.

Although the 2022 IRP includes planned actions beyond 2026, regulators will not act upon or approve planned actions in periods beyond 2026 as part of our 2022 IRP filing.

The preferred plan proposes to, subject to regulatory approval, create a regulatory asset as a vehicle to recover costs related to a future withdrawal from Coyote Station, including the net book value of the plant on the withdrawal date, anticipated decommissioning costs and any required costs incurred as a result of an early termination of the existing lignite sales agreement, under which Coyote Station acquires all of its lignite coal from a nearby mine.

The NDPSC's rules and regulations were finalized and became effective on January 1, 2023.

Under the finalized regulation, utilities are required to submit, for approval by the NDPSC, a 15-year advance IRP every three years.

On September 1, 2021, OTP filed its 2022 IRP concurrently with regulators in Minnesota, North Dakota and South Dakota.

The 2022 IRP included OTP’s preferred plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and affordable electric service rates, based on the information available at that time.

The preferred plan as outlined in the 2022 IRP included the addition of dual fuel capabilities at our Astoria natural gas plant, the addition of 150-megawatts of solar generation, the addition of 100-megawatts of wind generation, and the commencement of the process of withdrawing from our 35 percent ownership interest in Coyote Station, a jointly-owned, coal-fired generation plant, by December 31, 2028.

Subject to regulatory approval, the preferred plan proposed to create a regulatory asset as a vehicle to recover costs related to a future withdrawal from Coyote Station, including the net book value of the plant on the withdrawal date, anticipated decommissioning costs and any required costs incurred as a result of an early termination of the existing lignite sales agreement (LSA), under which Coyote Station acquires all of its lignite coal from a nearby mine.

As part of the filing, OTP developed an estimate of the reasonably foreseeable costs of withdrawing from Coyote Station at the end of 2028 of $68.5 million.

These costs may differ from actual results due to the uncertainty and timing of future events associated with the terms and conditions of a withdrawal.

On October 14, 2022, OTP submitted a supplemental filing to update its 2022 IRP, requesting the procedural schedule in Minnesota be amended to allow additional time to update our resource modeling given significant changes in the energy industry since the original 2022 IRP filing, while maintaining the original procedural schedule as it relates to adding dual fuel capability at Astoria.

Our original filing proposed fuel oil as the secondary on-site fuel at Astoria and our supplemental filing reflects revised cost estimates and proposes liquified natural gas as the most cost-effective secondary fuel source.

The primary changes and events which led to OTP's request include FERC’s approval of MISO’s new seasonal

resource adequacy construct, MISO’s proposal to significantly increase winter and spring planning reserve margins, and enactment of the IRA.

A notice of the request submitted to the MPUC was also provided to the NDPSC and SDPUC.

On November 1, 2022, the MPUC approved OTP's requested changes to the procedural schedule for the 2022 IRP.

OTP plans to file an updated resource plan in March 2023, pursuant to the amended schedule.

In conjunction with the updated resource plan, OTP's preferred plan could change based on the results of updated resource modeling incorporating the factors listed above, as well as other changes.

A change to the preferred plan could ultimately impact the nature, timing and amount of future capital investments, as well as the potential for OTP's withdrawal from Coyote Station.

Capital Structure Petition

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Once approved, OTP may issue securities without further petition or approval, provided the issuance is consistent with the purposes and amounts set forth in the approved petition.

OTP’s current capital structure approved by the MPUC on January 26, 2022, allows for an equity-to-total-capitalization ratio between 48.0% and 58.7%, with total capitalization not to exceed $1.7 billion.

OTP’s current capital structure approved by the MPUC on November 8, 2022, allows for an equity-to-total-capitalization ratio between 47.5% and 58.0%, with total capitalization not to exceed $1.8 billion.

Renewable Energy Standard

25% by 2025 and 55% by 2035.

Qualifying renewable sources are classified as wind, hydropower, hydrogen, and certain biomass generation.

We met the current renewable sources requirements with a combination of owned renewable generation and purchases from renewable generation sources.

Minnesota law also requires 1.5% of total Minnesota retail electric sales by public utilities to be supplied by solar energy.

OTP plans to purchase Solar Renewable Energy Credits to meet its obligations until its Hoot Lake Solar and other solar projects are complete and operational.

Under certain circumstances, and after consideration of customers' utility costs and reliability issues, the MPUC may modify or delay implementation of the standards.

We are evaluating potential options for maintaining compliance and meeting the solar energy standard beyond 2022.

Minnesota Clean Energy Bill

In February 2022, Minnesota enacted the Clean Energy Bill, which requires electric utilities to generate or procure sufficient electricity from carbon-free resources, to provide retail customers in Minnesota with at least the following percentages of carbon-free electric energy:

80% by 2030, 90% by 2035, and 100% by 2040.

Carbon-free resources include wind, solar, hydropower, and nuclear generation.

To provide flexibility, the law allows electric utilities to use renewable energy credits (RECs) to offset carbon emissions and for the MPUC to consider whether a regulated utility's requirement to meet established standards should be delayed due to affordability or reliability impacts.

OTP is in the process of reviewing its plan for compliance with the newly enacted law.

ENVIRONMENTAL REGULATION

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However, new or amended laws and regulations or changes in interpretations of current laws and regulations may require additional pollution control equipment or emission reduction measures and there can be no assurance that our facilities will remain economic to operate.

Prudent expenditures incurred to comply with environmental regulations are eligible to be recovered in rates granted by regulators in jurisdictions in which we operate;

however, there can be no assurance that future costs will be granted recovery.

Alternatively, additional pollution control equipment or other emission reduction measures may prove to be uneconomic with the potential to lead to the exiting of a facility earlier than originally planned.

As it relates to our jointly owned facilities, we may determine it is necessary to transfer, sell or otherwise divest of our ownership, or the ownership group may determine the early closure of a facility is necessary.

For the five-year period ended December 31, 2021, OTP invested approximately $13.3 million, including $0.9 million in 2021, in environmental control facilities.

Our construction budgets for the next five years include an approximately $6.0 million of capital investments in environmental control equipment.

Prudent expenditures incurred to comply with environmental regulations are eligible to be recovered in rates authorized by regulators in jurisdictions in which we operate;

however, there can be no assurance that future costs will be authorized for recovery.

Alternatively, additional pollution control equipment or other emission reduction measures may prove to be uneconomic potentially leading to the exiting of a facility earlier than originally planned.

As it relates to our jointly-owned facilities, we may determine it is necessary to transfer, sell or otherwise divest of our ownership, or the ownership group may determine the early closure or repurposing of a facility is necessary.

For the five-year period ended December 31, 2022, OTP invested approximately $10.4 million in environmental control facilities, including $0.4 million in 2022.

Our construction budget for the next five years includes approximately $6.1 million of capital investments in environmental control equipment.

The timing and amount of our expenditures may change as the regulatory environment changes.

Among current regulatory requirements, the Regional Haze Rule (RHR) could have the most significant impact on our operating results, financial condition and liquidity.

Among current regulatory requirements, the federal Regional Haze Rule (RHR) could have the most significant impact on our operating results, financial condition and liquidity.

The Environmental Protection Agency (EPA) adopted the RHR in 1999 as an effort to improve visibility in national parks and wilderness areas.

The RHR requires states, in coordination with the EPA and other governmental agencies, to develop and implement plans to work towards achieving natural visibility conditions by the year 2064.

The RHR requires states, in coordination with the EPA and other governmental agencies, to develop and implement state implementation plans (SIPs) which work towards achieving natural visibility conditions by the year 2064, to set goals to ensure reasonable progress is being made, and to periodically evaluate whether those goals and progress are on track or whether additional emission reductions are appropriate.

The second RHR implementation period covers the years 2018-2028.

States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.

Coyote Station, OTP's co-owned coal-fired power plant in North Dakota is subject to assessment in the second implementation period under the North Dakota state implementation plan.

In September 2021, the North Dakota Department of Environmental Quality (NDDEQ) made public a draft of its state implementation plan.

The plan concluded it is not reasonable to require additional emission controls during this planning period.

Following a consultation and public comment period and any subsequent modifications to the plan, the NDDEQ will submit its state implementation plan to the EPA for approval.

In January 2022, the EPA provided preliminary comments on the North Dakota state implementation plan in which it expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls.

See Note 13 to our consolidated financial statements included in the report on Form 10-K for additional information.

Coyote Station is subject to assessment in the second implementation period under the North Dakota SIP for the RHR.

The North Dakota Department of Environmental Quality (NDDEQ) submitted its proposed SIP to the EPA for approval in August 2022.

In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period.

The EPA submitted comments during the development of the SIP requesting NDDEQ to reassess its determination for Coyote Station.

The EPA is anticipated to take proposed action and potential final action on the SIP in 2023.

See Note 13 to our consolidated financial statements for additional information.

Climate Change and Greenhouse Gas Regulation

Global climate change presents a significant energy and environmental policy challenge.

Combustion of fossil fuels for the generation of electricity is a considerable source of carbon dioxide (CO 2 ) emissions, which is the primary greenhouse gas (GHG) emitted by our utility operations.

Combustion of fossil fuels for the generation of electricity is a considerable source of CO 2 emissions, which is the primary GHG emitted by our utility operations.

The federal government and many states are pursuing climate policies to regulate GHG emissions as part of a broad-based effort to limit global warming.

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rejoined the United Nations Framework Convention on Climate Change (the Paris Agreement), which is a legally binding international treaty on climate change adopted by over 190 countries.

The goal of the Paris Agreement is to limit global temperature increase to well below 2° Celsius compared to pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5° Celsius.

The Biden Administration has announced the goal of reducing greenhouse gas emissions by 50 to 52 percent from 2005 levels in 2030 and to reach 100 percent carbon pollution-free electricity by 2035 as part of the U.S.

The goal of the Paris Agreement is to limit the global temperature increase to well below 2° Celsius compared to pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5° Celsius.

The Biden Administration has announced the goal of reducing GHG emissions by 50 to 52 percent from 2005 levels in 2030 and to reach 100 percent carbon pollution-free electricity by 2035 as part of the U.S.

plan to achieve the goals under the Paris Agreement.

The implementation of climate change programs, such as the Paris Agreement, and federal or state regulations targeting GHG emissions may have a significant impact on our utility business.

In February 2022, Minnesota enacted the Clean Energy Bill, which requires electric utilities to generate or procure sufficient electricity from carbon-free resources to provide retail customers in Minnesota with at least the following percentages of carbon-free electric energy:

80% by 2030, 90% by 2035, and 100% by 2040.

The implementation of climate change programs, such as the Paris Agreement, the Minnesota Clean Energy Bill, and other federal or state regulations targeting GHG emissions may have a significant impact on our utility business.

Specific regulatory measures to address climate change continue to evolve.

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In October 2021, the U.S.

Supreme Court agreed to hear a consolidated challenge to the Court of Appeals decision.

The Supreme Court's decision, expected in mid-2022, could significantly impact the legal authority of the EPA to regulate CO 2 and other greenhouse gas emissions.

Supreme Court agreed to hear a consolidated challenge to the Court of Appeals decisions.

In June 2022, the U.S.

Supreme Court issued its opinion in the case of West Virginia v.

EPA, finding that in Section 111(d) of the Clean Air Act, Congress did not grant the EPA the authority to broadly regulate GHG emissions under the Clean Air Act, including the setting of emissions limits for existing power plants based on the power sector’s ability to shift to cleaner renewable energy sources (a process known as “generation shifting”).

The Supreme Court found that the authority to regulate issues that have broad economic or political consequences (known as the “major questions doctrine”) requires explicit Congressional authorization in law.

In the first half of 2023, the EPA is expected to issue a proposed rule under Clean Air Act section 111(d), replacing or revising the previously proposed ACE rule.

Although this future proposed rule is subject to the constraints of the Supreme Court’s West Virginia v.

EPA decision, the rule nevertheless has the potential to impact the emissions controls needed at OTP’s coal-fired power plants.

While the future financial impact of any current, proposed, or pending litigation or regulation of GHG or other emissions is unknown at this time, any capital or operating costs incurred for additional pollution control equipment or emission reduction measures could materially adversely impact our future operating results, financial position, and liquidity unless such costs could be recovered through related rates and/or future market prices for energy.

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The principal method of production distribution is by direct shipment to our customers through direct customer pick-up or common carrier ground transportation.

No single customer or product of our manufacturing businesses accounted for 10% or more of our consolidated operating revenue in 2021.

However, the top three customers combined to account for 46% of our 2021 Manufacturing segment operating revenue.

No single customer or product of our Manufacturing segment businesses accounted for 10% or more of our consolidated operating revenues in 2022.

However, the top three customers combined to account for 50% and 46% of our 2022 and 2021 Manufacturing segment operating revenues, respectively.

COMPETITIVE CONDITIONS

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Managing price volatility and ensuring raw material availability are important aspects of our business.

We attempt to pass increases in the costs of

these raw materials on to our customers.

We attempt to pass increases in the costs of these raw materials through to our customers.

Increases in the costs of raw materials that cannot be passed on to customers could have a negative effect on profit margins.

Additionally, a certain amount of residual material (scrap) is a by-product of the manufacturing and production processes.

Declines in commodity prices for these scrap materials due to weakened demand or excess supply can negatively impact the profitability of our Manufacturing segment as it reduces their ability to mitigate the cost associated with excess material.

ENVIRONMENTAL REGULATION

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No single customer of the PVC pipe companies accounted for 10% or more of our consolidated operating revenues in 2022.

However, two customers, both of which are distributors of PCV pipe, combined to account for 50% of our 2021 Plastics segment operating revenue.

However, two customers, both of which are distributors of PVC pipe, combined to account for 46% and 50% of our 2022 and 2021 Plastics segment operating revenues, respectively.

COMPETITIVE CONDITIONS

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There are four vendors from which we can source our PVC resin requirements.

In 2021 we sourced all of our PVC resin needs from two vendors.

In 2022 we sourced all of our PVC resin from two vendors.

Our contractual arrangements to acquire resin generally include estimated annual order quantities with no required minimum purchases, and include variable pricing based on market prices for resin.

The supply of PVC resin may also be limited primarily due to manufacturing capacity and the limited availability of raw material components.

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These plants are subject to the risk of damage and production shutdowns because of exposure to hurricanes or other extreme weather events that occur in this part of the United States.

The loss of a key vendor, or any interruption or delay in the supply of PVC resin could disrupt the ability of the Plastics segment to manufacture products, cause customers to cancel orders or result in increased expenses for obtaining PVC resin from alternative sources, if such sources were available.

The loss of a key vendor, or any interruption or delay in the supply of PVC resin could disrupt the ability of our Plastics segment businesses to manufacture products, cause customers to cancel orders or result in increased expenses for obtaining PVC resin from alternative sources, if such sources were available.

We believe we have good relationships with our key raw material vendors.

Due to the commodity nature of PVC resin and PVC pipe and the dynamic supply and demand factors worldwide, historically the markets for both PVC resin and PVC pipe have been very cyclical with significant fluctuations in prices and gross margins.

In addition to PVC resin, we use certain other materials, such as tin stabilizer, gaskets and lumber, in the process of manufacturing and shipping our PVC pipe products.

In addition to PVC resin, we use certain other materials, such as stabilizers, gaskets and lumber, in the process of manufacturing and shipping our PVC pipe products.

We generally source these materials from a limited number of suppliers, and supply chain constraints or disruptions related to these materials could disrupt our ability to manufacture or ship products and could result in increased costs.

Demand for our PVC pipe products can be impacted by seasonal weather differences, with generally lower sales volumes realized in the first quarter of the year when cold temperatures and frozen ground across the northern portion of our footprint can delay or prevent construction activity.

ENVIRONMENTAL REGULATION

Our plastics businesses are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water, the management and disposal of hazardous substances, the cleanup of contaminated sites and health and safety matters.

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What changed 10-K

Item 1. Business